Three OEB Commissioners in December did what adjudicative panels of the OEB are in the habit of doing. In an Enbridge rate case, they made a principled and difficult decision, based on extensive evidence and review, to remove the subsidy of new customers’ connections by existing customers, effective January 1, 2025.
The billions of dollars of stranded assets likely to result from the subsidy are becoming a significant risk for existing customers, they said, and have to be ameliorated in some way. Two Commissioners said that the risk should be removed entirely, so the subsidy should be reduced to zero. One Commissioner dissented, saying that the subsidy should be cut in half as a first step, and a generic review should be undertaken to determine whether or when the next step to zero subsidy is appropriate.
Enbridge and some Ministry staff had already anticipated this possibility. (They reviewed the evidence too.) Within 15 hours, overnight, the Minister issued a press release stating that the decision would increase the cost of new homes by tens of thousands of dollars (not true), was poorly reasoned and contrary to the public interest (not true), and thus would be reversed by the government (apparently true).
The Minister did not read the Decision of the Commissioners, of course. Not his job. No-one in the provincial cabinet did either. Only Enbridge and Ministry staff did so. But the die was truly cast with the press release. The government was going to reverse a decision of the independent regulator made after months of detailed review of the evidence.
Independent regulator? What do they know, after all?
So now we have the Save Enbridge Act. Technically, it is the Keeping Energy Costs Down Act, but it makes no sense to call it that. There is no intention to keep energy costs down, and it obviously will not do that. Its intention is to save Enbridge by allowing the government to overrule evidence-based decisions of an independent expert body, in favour of the influence of lobbyists. Energy costs will certainly rise as a result.
Some things are just not complicated.
Further, it went much further than simply reversing the connection subsidy decision. Therein lies the real victory here for Enbridge.
What Does the Act Say?
Here’s what the proposed legislation would do.
Connection Costs. As a first step, the decision to get rid of the subsidy will be reversed, so that existing customers will continue to finance new connection costs in their rates for a period of forty years, as was previously the case. At the same time, the government will require a second step – a generic hearing by the Ontario Energy Board on how new gas connections should be funded. The terms of that generic hearing, including what issues should be considered, who should be invited to participate, and parameters around the potential outcomes, will be stipulated by the government. If the government doesn’t like the result, it can rescind it.
There are two interesting things about that.
First, a generic review of the issue, with new participants (like builders and developers) was contemplated in the initial decision that is under attack. It is absolutely a good idea. That is precisely why implementation was delayed until 2025. The difference is that, as contemplated by the new legislation, the Minister will now be able to put a thumb on the scale in that adjudicative process.
Second, the return to the forty year subsidy doesn’t change the net cost to the new customers. In the decision, those new customers were to pay for their own connections (average $4,200 or less), but then get a bill credit reducing their rates going forward to pay that money back to them. They would net out at no cost if they remained on gas through the life of the new spending.
No, the difference is in Enbridge’s profit. If the connection costs are subsidized, Enbridge gets to add a profit margin to the annual amortization of those costs. If the connection costs are paid up front, Enbridge makes no profit on that capital, because they wouldn’t be funding it. The total over the next five years is likely to be in the range of a billion dollars. Annual profit on that for Enbridge shareholders, after tax, is about $38 million, which translates into a $52 million annual rate impact when taxes are figured in. Add in the interest and depreciation each year, and the annual rate impact is over $100 million on that incremental billion dollars.
In a related motion at the OEB, Enbridge has complained directly that it would lose that annual profit from new connections. So, as they put it, why would they even connect anyone anymore?
An important collateral impact should be noted: without the free connection to gas, many new home buyers could end up preferring electric heat pumps rather than gas furnaces, which would on average save them $16,000 over the life of the equipment, and reduce their GHGs to nil.
New and Existing Projects. The government is giving itself a new power to interfere in existing and future applications by Enbridge to the OEB to build new pipelines.
Although this new power seems to be pretty broad, in fact it is likely aimed at one $290 million project in SW Ontario, called the PREP line, currently the subject of a case before the OEB. The evidence in that proceeding is not in Enbridge’s favour. Enbridge wanted the cost of the line to be spread over all of their customers, even though almost all of their customers wouldn’t benefit in any way. Opponents are taking the position that those who were benefitting from the new line should pay for it. The evidence appears to show that is the right result.
Enbridge says they don’t want the new businesses and other customers in SW Ontario to have to pay the higher rates such a decision would require, but the real driving force is that Enbridge would lose their annual $11 million profit adder on that capital spending, . In any case, Enbridge appears to be in danger of losing. With the new legislation, the government can step in and force everyone to subsidize new service to the greenhouses and gas generators served by the new line.
The OEB Act would normally not allow the government to interfere in independent regulatory adjudications. Much like the courts, the concept is that the parameters for hearings are set in advance in legislation, and then the regulatory body must establish procedures to ensure that the proceedings are fair to all. Again like the courts, the government is not allowed to interfere.
This legislation would change that. For all such projects, including PREP, the government would be allowed to establish what issues have to be considered, who is allowed or required to participate in the hearings, and the parameters for any decision. The government could also determine that there should, or even must, be a subsidy by existing customers for the new customers, and whether the new customers should contribute at all to the cost. Even after all that, if the government doesn’t like the decision, they can rescind it.
Generic Hearings. The broadest part of the legislation is a new power for the government to require the OEB to hold a hearing on any issue or issues that the government decides, and to stipulate rules about who should participate and how that hearing should be run. This includes the power to interrupt an existing hearing process for this purpose. In short, the OEB will be required to do some aspects of its supposedly independent adjudicative work under direct government supervision.
Note that the requirement for generic hearings is not a bad thing. Energy policy would often benefit from rigorous review of more generic issues. The problem is what some are calling the new “pull-back power”. That is, the government is seeking to undermine the independence of the regulator by interfering with existing proceedings if the Minister doesn’t like the way the evidence is pointing.
Duty of Fairness. When government employees or Ministers make decisions affecting peoples’ rights, generally speaking they are required to act fairly. This legislation expressly removes that duty with respect to the new powers given to the Minister to direct hearings, and determine exactly how those hearings will be carried out, what issues should be addressed, and who must participate. The Minister can make those decisions in secret, consider whatever he or she wants to consider, refuse to consider the views of affected parties, and in general make those decisions in a manner that is demonstrably unfair. That is all OK.
Imagine, if you will, that a court in Ontario was hearing a class action suit against a developer who was a friend of the government. Imagine that the government tabled new legislation giving itself the right to interfere in that lawsuit, establishing new procedures to be used, and the timelines, and the issues that can or must be considered, and deciding who can participate. Imagine all of this being done with the developer privately discussing the case with the government ministers and urging a process favourable to its interests. Imagine that there was no requirement that the government act fairly in any of this.
Some people might consider this unacceptable.
This, in the energy context, is exactly what the Save Enbridge Act is proposing to do in the area of adjudication of natural gas rates and issues. The Act proposes to move regulation of natural gas from evidence-based public review by an independent regulator, to back-room dealings between the regulated party and the government.
This is the most successful result to date of the Enbridge lobbying strategy.
The Government’s Position
One would hope that the government simply hasn’t thought this through.
There are at least three compelling reasons why, from the government’s point of view, this is a bad idea.
Long Term. First, the government is choosing the wrong side in a future that is already pretty predictable. Enbridge overbuilding in the face of the Energy Transition is going to be a problem. Billions of dollars of spending is going to be stranded, and someone (it won’t be Enbridge) is going to have to cover those costs.
This isn’t a situation in which later there will be an excuse for getting it wrong. Sooner or later, it will be clear that the government backing subsidized Enbridge system expansion was always about saddling customers or taxpayers (your kids and mine) with billions of dollars of unnecessary costs and risks. Further, the result was always going to be that Enbridge could not be saved.
For many in government, being found to be on the wrong side, twenty years later, may not be a concern. For those – politicians or bureaucrats – who are looking to create a legacy from their service, though, they should be concerned. No good legacy can come from this legislation. This legislation expressly chooses the wrong side. The only possible legacy is a notorious legacy. That is the long term reason why this legislation is a bad idea.
Medium Term. Second, in the medium term, the government is telling the sector that all important energy regulatory decisions will be made in the future by the Minister, influenced by lobbying rather than by the independent regulator.
How this will unfold is still uncertain.
On the one hand, the OEB could stick to its guns, continuing to make principled decisions based on well-tested evidence, and protecting the interests of gas customers, all as required by the legislation governing the OEB.
If that happens, then aggrieved utilities and others will still have the existing two options to complain about those decisions: 1) move to have the decision reviewed by another panel of OEB Commissioners, alleging in the process that the decision is not reasonable, or 2) go to court to argue that the part of the decision they don’t like is contrary to law.
Enbridge has already done both in the case of the December decision they are whining about now.
However, this new legislation adds a third option to complain: lobbying. Aggrieved utilities and others can go directly to their favourite politician and urge them to interfere with the decision. In fact, even before a decision is released, those parties will go to the politicians to set out their case for why, if the decision is unfavourable, it must be wrong. This is, in fact, exactly what Enbridge did in the current rate and PREP cases.
All of this means that, in the future, when the OEB is in the process of adjudicating anything important, there will be a parallel process in which all of the same parties lobby government to agree with their view of what the right result should be.
The Minister will be busy. Or, alternatively, he or she can just listen to friends, and tell everyone else to buzz off. There’s no need to be fair, after all.
The Minister will also have to consider, on a regular basis, whether OEB Commissioners or even staff that are being too independent-minded should be replaced by those who will do what they are told.
That all assumes that the OEB takes a defiant approach.
The other possibility is that the OEB Commissioners, understanding that they have a new boss (no, not Enbridge; the Minister), will either overtly or covertly start to tailor their decisions to be politically acceptable to the Minister. Remember, these are people. They don’t want to lose their jobs any more than you do. They may not like reading speeches of the Minister rather than evidence in order to reach their decision, but if some level of obeisance or even genuflection is required, it is at least possible that they will go there.
Either way, the result is that lobbying becomes the way to make things happen.
A related impact is an increase in the cost of utility debt. The Bond Rating Agencies consistently tout the expert and independent regulatory system in Ontario as a favourable de-risking factor for Ontario regulated utilities, resulting in better debt ratings. That will no longer be the case.
If Ontario utilities no longer benefit from an expert regulatory process, independent of political influence, how much will that cost electricity and gas utilities each year in higher interest rates on their $80 billion of debt? To provide context, each 10 basis points (one-tenth of one percent) increase in interest rates would be an additional cost to ratepayers of $80 million per year.
Short Term. Third, the immediate result is that a government already accused by some of being overly influenced by their friends is shifting decision making in an important sector behind closed doors. The government is making an overt decision that influence will matter more than evidence. For some stakeholders, this will imply that decisions in this area will be based on improper influence, not by consideration of the public interest. Otherwise, why move the process out of the public eye?
For a government that is doing (I hate to admit it) a relatively competent job running the province, but may be suspected of inappropriately benefiting their friends by some voters, this could lose them votes in the next election.
Just the reversal of the current Enbridge connections decision may be seen as already a tad odorous. The Ministry Staff who wrote the press release and supervised this legislation include a former Enbridge lobbyist. The legislated result could have been written by Enbridge, given how it tracks their goals. Many government members have received substantial political donations and other support from Enbridge.
You can see how that could all be spun publicly in the next election.
Then, when you add a new power to listen to lobbyists on all issues, rather than rely on evidence-based decisions – a power to act in the interests of your friends with no duty to be fair to anyone – it looks like the government is not only doing something wrong in this particular case. They also may, in some eyes, be giving themselves the right to continue to act unfairly, and behind closed doors, in the future. Institutionalizing influence.
Sometimes excess of hubris is visited with political consequences.
Conclusion
Enbridge is fighting for survival. They have done a disciplined analysis, and determined that they would benefit from moving decisions affecting their future away from the independent regulator, and into the hands of the politicians. Doing so allows them to ignore the facts (which are largely unfavourable to them), and rely on their undoubted strength and resources as lobbyists.
They are more confident that in private meetings they can convince politicians and their staffs of their particular point of view, as opposed to convincing an independent expert tribunal that relies on evidence thoroughly tested in a public process.
The Save Enbridge Act is a major step in the success of that strategy. In the long term, the public interest will suffer. In the shorter term, however, Enbridge may reap their profits a little while longer.
- Jay Shepherd, March 7, 2024
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